Ethics Guy®: Short closing, big deposit

There’s a special kind of frenzy that happens when a blistering market is about to become, well, less blistering. No one ever thinks it will end. Yet, it can be difficult to remember today’s effervescent deal after its bubbles are long gone. Tasting the soured flatness of yesterday’s not-so-bubbly deal is not nearly as much fun.

Do I have a crystal ball? No—and I don’t presume to have the kind of brains people like the oil price prognosticators have either. I mean, who could’ve guessed, with their finely honed experience, vast computing power and market knowledge they’d fail to predict that a barrel of oil fetching nearly US$100 in 2014 would yield a meagre $35 in 2016 and bounce back to $96 today?

This suggests to me that my miserable liberal arts degree layered with about 40 years’ time spent in the real estate business is similarly unreliable when it comes to predicting, with any certainty, where our market is headed. What I do know is this: what goes up must come down. When? Who knows? While I hope for all it’s a mild adjustment, there’s a possibility it won’t be. My physics teacher’s voice comes to mind: (big sigh) “You’re a great steaming twit, Spencer. Have you forgotten that for every action there’s an equal and opposite reaction?”

Our market has been so hot for so long that we’ve forgotten this is not a normal market. Could there be a wild swing to an excess of inventory with no buyers and price drops in the future? I hope not, but it has happened before, notably from 1981 to 1985. That market change happened after an oil price shock; a big federal deficit and a rapid increase in interest rates. When I first wrote this in 2016, we had two out of three. Circa, 2022—I’d say we now have three out of three.

When prices get wobbly, buyers don’t want to buy. Assignees head for the hills and assignors get nervous. Original buyers of contracts later assigned forget that, if all those assignees fall like dominoes, the seller will still expect the first buyer to close no matter how many times the contract was assigned. 

Eventually, these soon-to-be sellers, buyers, assignors, and assignees will come looking for the guy who got them into the deal. They’ll forget the euphoria of the moment when they happily signed on the dotted line. They’ll expect you to explain why you didn’t tell them about the possibility that things might not be as rosy on closing day. Buyer’s remorse will set in. 

This brings me to some basic risk management, which I hope you’ve been practising. If not, then it’s time to start with your next deal. In no particular order, here’s a baker’s dozen of risk management tips:

1. Save your fees for a rainy day. Your expenses don’t ever stop, but your income can.
2. Get your buyers and sellers to initial the comparative market analysis that you prepare for them. Keep that copy in your records. Get into the practice of making notes in your file about what you’ve said and done.
3. Tell your clients everything. We’re the pipeline, not a filter. Once you’ve said everything you know and explained the risks and rewards of the clients’ options, ask for their instructions.
4. Follow those instructions to the letter. Confirm their instructions as well as the advice that you give in writing.
5. Don’t use text, email, or the phone to put together deals expecting that the details will be approved on paper afterwards.
6. If you can’t be in the same room with the people who need to sign, use DocuSign or other approved electronic signature applications to bind the parties together as they make the agreement.
7. Hold the buyers’ feet to the fire. Get a big deposit. If you’re acting for the seller, suggest the seller counter back to the buyer if the deposit isn’t at least five per cent of purchase price. If it’s a subject offer, then suggest countering the buyer for a goodly deposit up front, on acceptance, to be increased to five per cent of the purchase price on subject removal.
8. Beware of far-off completion dates. If the market goes up in the interim, the seller may not want to close. If the market drops, the buyer may not want to buy. Shorter dates lessen this risk.
9. Use our standard forms and the proper clauses as shown in WEBForms and/or the BC Financial Services Authority professional resources, including the Knowledge Base. 
10. Make your contracts as bulletproof as possible. We’re not lawyers. While it’s been said that a good lawyer can probably get the client out of a well-written deal, bulletproof contracts can be expensive and time consuming to break. Make it so completing the contract, with all its attendant costs, is cheaper than fighting it in court.
11. Promptly deliver to your clients the documents they sign.
12. Don’t give legal or other professional advice that you’re not qualified to give. It’s okay to say you don’t know or to suggest your clients seek advice from an appropriate person.
13. Make sure your clients understand the benefits, risks, and obligations they’re taking on when they sign a contract. The last thing you need is for them to say they didn’t understand what they were agreeing to.